Key Points: A financial institution which mistakenly dishonours a cheque may be liable for defamation if it cannot establish a defence of qualified privilege.

The High Court in Aktas v Westpac Banking Corporation Limited [2010] HCA 25 held that a notice of dishonour of a cheque due to a bank's error was not protected by the common law defence of qualified privilege. The manager of a real estate agency was awarded $50,000 for defamation after the bank dishonoured 30 trust account cheques he had signed.

The dishonoured cheques

Paul Aktas was the chief executive of Homewise Realty Pty Limited, which operated a real estate agency business in New South Wales. Homewise collected rent and paid landlords from a trust account with Westpac.

A garnishee order was served on the bank, requiring it to pay all of Homewise's debts to the Court for the enforcement of a judgment debt against Homewise. The bank reacted to the order on 1 December 1997 by dishonouring 30 cheques drawn on Homewise's trust account. The cheques were stamped "refer to drawer" and returned under cover of a pro forma letter.

It was later realised that the cheques should not have been dishonoured because the garnishee order did not apply to the trust account.

Although Mr Aktas was not the drawer of the dishonoured cheques, he was known to the recipients of the dishonour notices and they identified him with Homewise.

In November 2002 Mr Aktas and Homewise commenced proceedings against the bank for defamation and breach of contract. The bank relied on the common law defence of qualified privilege. The statutory defence of qualified privilege was abandoned by the bank.

Common law qualified privilege is available as a defence to a claim for defamation on an occasion where for the common convenience and welfare of society one person has a duty or interest to make the publication and the recipient has a corresponding duty or interest to receive it. Typical examples are the giving of an employment reference or the making of a complaint to the police. The defence is not available if the defendant was actuated by "malice", meaning an improper motive.

The New South Wales Court of Appeal unanimously upheld the common law defence of qualified privilege. It referred to nineteenth century appellate decisions of the New South Wales and Victorian Supreme Courts upholding defences of qualified privilege for the mistaken dishonour of cheques.

Findings of the High Court

The High Court rejected the defence of qualified privilege, holding that the bank's mistake meant the notices of dishonour were not published on privileged occasions.

Rather surprisingly, four of the five judges did not refer to the earlier Australian appellate decisions. Justice Kiefel, who dissented, made only passing reference to one of them (Levy v Union Bank of Australia Limited (1896) 21 VLR 738).

According to the majority's reasons, there is already a sufficient statutory incentive for an institution to give prompt notice that a cheque is dishonoured; if it fails to do so, the cheque must be honoured (Cheques Act 1986, sections 67 and 69).

Defamation law should therefore not recognise a public duty to give notice of dishonour promptly but instead provide an incentive to be accurate when dishonouring cheques.

So what should financial institutions do now?

First, this case underscores the need for communications about customers to be backed by legally sound systems and procedures. While it may be impossible to eliminate mistakes altogether, if an institution can show it acted reasonably when giving a mistaken notice of dishonour then a statutory defence of qualified privilege is arguably available.

The statutory defence applies if the recipient has an interest or apparent interest in receiving information on a subject, the matter is published to the recipient in the course of giving that information and the conduct of the defendant is reasonable in the circumstances.

The court may take into account the nature of the business environment in which the defendant operated when determining whether its conduct was reasonable.

In order for there to be an "apparent interest", the defendant must believe on reasonable grounds that the recipient has that interest.

Secondly, the bank's offer to write to Homewise's clients to apologise for its error was prudent in this case. The offer to apologise broke the chain of causation between the notice of dishonour and Homewise's loss, thereby limiting the award of damages against the bank for breach of contract. An apology in connection with any defamatory matter does not constitute an express or implied admission and can mitigate damages.

Finally, the standing of most corporations to sue for defamation has been abolished throughout Australia, but individuals in the position of Mr Aktas can still bring proceedings. A corporation may be able to bring proceedings against an institution for incorrectly dishonouring a cheque on other grounds, such as misleading or deceptive conduct.